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After-hours
Trading Re-visited
A
year ago we looked at after-hours trading and we decided it
was time to re-visit this “market”.
On our last review of after-hours (and before-hours)
trading a year ago, some of the brokerage firms offered after-hours
trading and some didn’t.
Now, virtually all firms offer this form of trading.
A year ago we found that most firms had aligned themselves
with only one or a couple of the ECN’s (Electronic Communication
Networks) where these after-hour trades actually take place,
but they may not have a relationship with all 10 available
ECN’s.
This is still true.
So, depending on who your broker does business with
you may be buying a stock on one ECN at a price higher than
it is available on another ECN they don’t have a relationship
with.
The
same holds true for when you’re selling a stock, you may not
get the best price. Since these ECN’s are essentially
10 individual electronic markets, there is no guarantee a
stock isn’t trading at a different price on a different market.
Watch CNBC after the trading day and you will see newspeople
reporting from different ECN’s. They provide this separate
coverage because the trading activity is unique to each ECN.
Volume in the after-market is usually very thin. Dangerously
thin! If you are trying to sell 500 shares of a stock
you may receive a progressively lower price for each 100-share
block of stock if you’re brave enough to enter a market order.
If you enter a limit order you may only be able to get a partial
fill on your order. Depending on how your brokerage
charges commissions you may be charged a fee for each lot
filled at a different price. It’s almost a given that
in the after-hours market you will be buying a stock at a
price higher than it closed at in regular trading, and you
will be receiving a lower price for your shares when you go
to sell a stock. Other pitfalls to watch out for include:
limit orders entered during regular trading may not be executed
after hours even if the price is hit. Orders entered
specifically for the after-hours market will cancel at the
end of the after-hours session and won’t carry over to the
next day. As negative as we sound on after-hours trading,
there is a place for it and every investor should have an
account that allows for after-hours trading. Most companies
release earnings after the close of the regular trading day
ends, and by entering an order in after-hours trading you
might be able to dump a dog or buy a winner ahead of the bulk
of other investors. For example, last year ICGE was
trading at $17 on the day it was scheduled to release earnings
after-the-bell. It dropped to $11 after poor earnings
were released, but getting an $11 execution beat the $8 price
the stock opened at the next day during regular trading.
We believe every investor should have access to after-hours
trading, but given the pitfalls we feel most traders should
avoid using it.
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